TRIS Rating Co., Ltd. has downgraded the company rating of Regional Container Lines PLC (RCL) to “BBB-” from “BBB” and has also downgraded the rating of RCL’s senior debentures to “BB+” from “BBB-” with “negative” outlook. The downgrades reflect RCL’s operating performance that is weaker than expectation due to several unfavorable factors, including the surging bunker oil price, the volatility of the global economy, increasing competition in the Asian region, and the excess supply of vessels. In addition, RCL’s competitiveness in both the liner (carrier-owned container or COC) and the feeder (shipper-owned container or SOC) segments seems weaker than before. As a result, in 2011, RCL reported a net loss from operations of Bt2,051 million, compared with a loss of only Bt463 million in 2010. However, the ratings continue to reflect RCL’s capable and experienced management team and its relatively strong market position among regional feeders, resulting from the fleet size, frequency of service, and the young age of the fleet. The “negative” outlook reflects several unfavorable market conditions which are expected to pressure the company’s ability to improve its operating performance and financial position in the near term. In addition, the ratings could be downgraded further if the company still incurs significant losses and has liquidity problems in the coming quarters. However, should the company successfully increase freight rate to improve its profit margins and generate sufficient operating cash flow to repay its debts, its would be positive for the company’s ratings and/or outlook.
TRIS Rating reported that in 2011, RCL reported a drop of lifting volume by 7%. In addition, the average freight rate remained low at approximately US$191 per twenty-foot equivalent unit (TEU) during 2010-2011. The main factors were due to the economic slowdown in both the United States (US) and the European Union (EU), coupled with an excess supply of vessels that intensified the competition. In 2011, RCL spent a total of US$196.1 million on bunker oil, compared with US$148.4 million in 2010. As a result, in 2011, bunker cost as a percentage of total revenue jumped to 44% from only around 31% in 2010. The bunker surcharge, which is collected from customers, did not change much from 2010. Therefore, RCL could not recover much from the recent leap in fuel costs.
TRIS Rating said, the declining in lifting volume, coupled with the higher bunker price, caused RCL’s earnings and cash flow protection to be worse than projections. The adjusted operating margin deteriorated significantly, falling from 8.4% in 2010 to -2.3% in 2011. In addition, the adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio decreased from 2.5 times in 2010 to -0.5 times in 2011. The adjusted funds from operations (FFOs) to total debt ratio also declined, sagging from 8.0% in 2010 to -6.1% in 2011. However, RCL’s financial leverage, as measured by the total debt to capitalization ratio, improved, as the ratio slightly declined from 46.7% in 2010 to 45.6% in 2011. At the end of December 2011, the company had Bt4,589 million cash on hand. However, the liquidity position of RCL is tighter as it must repay debts of Bt3,600 million in 2012. Furthermore, the company plans to acquire two new vessels which will be delivered in 2012-2013. The purchases of both vessels are expected to be financed with loans. Most of RCL’s credit facilities contain several financial covenants relating to leverage and EBITDA-related ratios. The company has successfully negotiated with its lenders to remove the EBITDA-related ratios from the financial covenants. However, the company has to maintain a minimum of US$40 million in cash on hand for the life of the loan agreements.
According to a research by Alphaliner, industry capacity during 2012-2013 will rise by approximately 3.2 million TEUs or 26% of the existing capacity, as carriers build more ships. In addition, in the first three months of 2012, the bunker price increased to approximately US$730 per metric ton from around US$638 per metric ton in 2011. The price of bunker oil is expected to remain at this high level. In the first quarter of 2012, main line operators successfully rationalized their shipping capacities and increased freight rates. Despite this move, the ability of RCL to lift its freight rates remains to be seen, as it has low bargaining power compared with main line operators, which have worldwide market coverage. RCL’s ability to increase its freight rates will be vital for its ability to pass through this tough time, said TRIS Rating. — End
Company Rating: Downgraded to BBB- from BBB Issue Rating: RCL12OA: Bt2,500 million senior debentures due 2012 Downgraded to BB+ from BBB- Rating Outlook: Negative
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